Goldman Sachs, Still Playing in Bayou’s Mud — Fair Game

The following is an excerpt from an article in 

The New York Times
Sunday, August 19, 2012

Goldman Sachs, Still Playing in Bayou’s Mud — Fair Game

By GRETCHEN MORGENSON

THE story of the Bayou Group, the hedge fund firm that collapsed in a whirl of lies and drugs, was always a little weird. But it just keeps getting weirder.

You may recall Bayou — or at least its founder-turned-con man, Samuel Israel III. To the world, Mr. Israel was a trading whiz. Then, one August afternoon in 2005, the police responded to a 911 call from Bayou’s offices in Stamford, Conn., and found a note explaining how he had perpetrated a giant fraud.

Mr. Israel, it turned out, wasn’t managing a hedge fund at all. He was running a Ponzi scheme — a small-time version of the Madoff racket that, at that very moment, was still going strong. Mr. Israel, who said he’d become addicted to painkillers, was later sentenced to 20 years in prison — then two more for jumping bail, faking his suicide and going on the lam. His abandoned vehicle was found on the Bear Mountain Bridge over the Hudson River, the words “suicide is painless” written in the dust on the hood.

Now, as Mr. Israel sits in jail, this tale has taken yet another twist. It came late last month from, of all places, Goldman Sachs.

Goldman had executed and cleared trades for Bayou, and there were questions about how well Goldman supervised the account. On July 30, Goldman paid $20.7 million to roughly 200 Bayou investors in the United States. Those investors, unsecured creditors in a separate Bayou bankruptcy case, were awarded that amount by a securities arbitration panel in June 2010.

It was one of the few bright spots of the Bayou story, but it didn’t last. The same day Goldman paid the investors, the firm filed its own creditor’s claim for the same amount — $20.7 million — in the Bayou bankruptcy. Goldman contended that paying the award had made it, too, a Bayou creditor. If the court agrees, the investors who won their arbitration case — also unsecured creditors of Bayou — will be out of luck.

Ross B. Intelisano, a partner at Rich, Intelisano & Katz in New York who represented the Bayou investors, said they would fight Goldman’s latest filing.

I asked Goldman last week about the bankruptcy court filing. Michael DuVally, a spokesman, said Goldman never controlled the money at issue in the arbitration.

“Our claim is consistent with bankruptcy law,” he said in a statement. “The arbitration panel, which was not ruling on wrongdoing, determined that money the Bayou funds deposited with us while insolvent needed to be returned to the estate to distribute to creditors. With the ruling, we became a creditor entitled to compensation along with the other victims of the fraud.”

The statement continued: “We were harmed by the Bayou funds and those funds should bear responsibility for the actions we took on their behalf and at their direction.  At the end of the day, it was their fraudulent behavior that was the principal cause of any damage suffered by Bayou investors.”

For more, visit www.nytimes.com.

TX Teacher Pension Buys Stake in Hedge Fund

Excerpt from an article in

The New York Times

Tuesday, March 06, 2012

Texas Teacher Pension Buys Stake in Bridgewater Hedge Fund

By AZAM AHMED

The Teacher Retirement System of Texas just went from hedge fund investor to hedge fund owner.

Last month, the Texas pension took a $250 million stake in Bridgewater Associates, the giant money manager. Now, rather than plowing money into specific portfolios, it can claim a piece of the whole operation.

It is an unusual move for a pension. By investing directly in Bridgewater, the Teacher Retirement System of Texas can share in the upside return without paying the high costs. But the large state pension is also betting on the long-term viability of a firm whose fortunes are associated with a single enigmatic founder, Ray Dalio.

"They are essentially making a double bet in this particular firm," said Elizabeth B. Nesvold, managing partner at Silver Lane, an investment banking adviser that specializes in asset managers. "When you think about the downside, you get a double whammy."

Unlike many businesses, hedge funds are often closely linked to one person who has driven their success. SAC Capital has Steven A. Cohen; Pershing Square Capital Management, William A. Ackman.

But as the largest hedge funds mature, many founders want to sell stakes in the businesses they have built. In the last year, firms like Millennium Management, started by Israel Englander, and the Rock Creek Group have sought outside investors.

In addition to handsome paydays, hedge funds want to diversify their ownership base, in part to fund a more stable supply of capital.

News Release from the FBI, Charlotte Division

Four Hedge Fund Managers Indicted in $40 Million Ponzi Scheme 
Defendants Join Seven Others and CommunityONE Bank Charged in Connection with the Scheme

U.S. Attorney’s OfficeFebruary 23, 2012

Western District of North Carolina(704) 344-6222

CHARLOTTE, NC—A federal grand jury sitting in Charlotte returned an indictment against Jonathan D. Davey, 47, of Newark, Ohio, Jeffrey M. Toft, 49, of Oviedo, Fla., Chad A. Sloat, 33, of Kansas City, Mo., and Michael J. Murphy, 51, of Deep Haven, Minn., on February 22, 2012, on four criminal charges relating to an investment fraud conspiracy, announced Anne M. Tompkins, U.S. Attorney for the Western District of North Carolina.

Joining U.S. Attorney Tompkins in making today’s announcement are Chris Briese, Special Agent in Charge of the Federal Bureau of Investigation (FBI), Charlotte Division, and Jeannine A. Hammett, Special Agent in Charge of the Internal Revenue Service-Criminal Investigation Division (IRS-CI).

According to the criminal indictment, the defendants operated “hedge funds” as part of a conspiracy that took in $40 million from victims for a Ponzi scheme operating under the name Black Diamond Capital Solutions (Black Diamond). The indictment alleges that the conspiracy lasted from about October 2007 through about April 2010. The indictment alleges that the defendants lied to get money from their victims by claiming, among other things, that they had done due diligence on Black Diamond and were operating legitimate hedge funds with significant safeguards, when in reality, neither claim was true. The indictment also alleges that, as Black Diamond began collapsing, the defendants and others created a new Ponzi scheme and with a separate Ponzi account that Davey administered. Thereafter, new victim money was deposited into the Ponzi account and used to make Ponzi payments to other victims and to fund the defendants’ lifestyles.

The indictment also charges Davey with tax evasion for claiming to the IRS on his 2008 tax return that $810,000 that Davey stole from victims was a “loan.” In reality, the indictment charges, Davey stole that $810,000, plus approximately $500,000 in 2009, from victims to build Davey’s personal mansion. Davey attempted to evade the taxes due and owing in 2008 by calling the money a “loan” from his investors to “Sovereign Grace, Inc.,” a Belizian corporation that Davey created as a diversion for his victims and the IRS.

The first charge against all four defendants, alleging conspiracy to commit securities fraud, carries a maximum sentence of five years’ imprisonment and a fine of up to $250,000. The second charge against all four defendants, alleging conspiracy to commit wire fraud, carries a maximum sentence of 20 years’ imprisonment and a fine of up to $250,000. The third charge against all four defendants, alleging a money laundering conspiracy, carries a maximum sentence of 20 years’ imprisonment and a fine of $250,000 or twice the amount of criminally derived proceeds. The final charge against Davey only, alleging tax evasion, carries a maximum sentence of five years’ imprisonment and a fine of up to $250,000.

The defendants will be making their initial appearances in U.S. District Court in the coming weeks.

This indictment follows a series of convictions and other charges in this matter. On December 16, 2010, Keith Simmons was convicted following a jury trial of securities fraud, wire fraud, and money laundering. Simmons is in custody awaiting sentencing.

On April 27, 2011, a criminal bill of information and a Deferred Prosecution Agreement were filed against CommunityONE Bank, N.A., for its failure to maintain an effective anti-money laundering program. As alleged in that bill of information, Simmons was a customer of CommunityONE, and used various accounts with the Bank in furtherance of the Ponzi scheme. However, as alleged in that bill of information, the Bank did not file any suspicious activity reports on Simmons, despite the hundreds of suspicious transactions that took place in his accounts.

Other defendants convicted in this case are set forth below. It should be noted that those defendants already sentenced had their sentences reduced by the Court to reflect their cooperation with the United States in its investigation and prosecution of others.

• Bryan Keith Coats, 51, of Clayton, N.C., pled guilty on October 24, 2011, to conspiracy to commit securities fraud and money laundering conspiracy. Coats is awaiting sentencing.
• Deanna Ray Salazar, 54, of Yucca Valley, Calif., pled guilty on December 7, 2010, to conspiracy to commit securities fraud and tax evasion. Salazar is awaiting sentencing.
• Jeffrey M. Muyres, 36, of Matthews, N.C., pled guilty on May 17, 2011, to conspiracy to commit securities fraud and money laundering conspiracy. Muyres was sentenced to 23 months’ imprisonment by Chief Judge Robert Conrad, Jr., on January 18, 2012.
• Roy E. Scarboro, 47, of Archdale, N.C., pled guilty on December 3, 2010, to securities fraud, money laundering, and making false statements to the FBI. Scarboro was sentenced to 26 months’ imprisonment by Chief Judge Robert Conrad, Jr., on May 4, 2011.
• James D. Jordan, 49, of El Paso, Texas, pled guilty on September 14, 2010, to conspiracy to commit securities fraud. Jordan was sentenced to 18 months’ imprisonment by Chief Judge Robert Conrad, Jr., on June 29, 2011.
• Stephen D. Lacy, 52, of Pawleys Island, S.C., pled guilty on December 9, 2010, to conspiracy to commit securities fraud. Lacy was sentenced to six months’ imprisonment by Chief Judge Robert Conrad, Jr., on May 4, 2011.

The details contained in this indictment are allegations. The defendants are presumed innocent unless and until proven guilty beyond a reasonable doubt in a court of law. The conviction or guilty plea of any other person is not evidence of the guilt of any of the defendants.

This matter is being prosecuted by Assistant United States Attorneys Kurt W. Meyers and Mark T. Odulio of the Western District of North Carolina, and the case against Jeffrey Muyres was prosecuted by Assistant United States Attorney Mark T. Odulio. The investigation is being handled by the FBI and the IRS.

Man Sentenced for Ponzi Scheme

News release from the FBI:

Atlanta Man Sentenced for Operating Ponzi Scheme
Vaughn Received Over $10 Million from Victims

U.S. Attorney’s Office February 07, 2012

Northern District of Georgia (404) 581-6000

— filed under: Breaking News, Press Release, White-Collar Crime

ATLANTA—CHARLES MICHAEL VAUGHN, 43, of Atlanta, Georgia, was sentenced to federal prison today by United States District Judge Richard W. Story on wire fraud charges in connection with a $10 million Ponzi scheme.

United States Attorney Sally Quillian Yates said, “Despite the fact that Ponzi schemes are one of the oldest types of fraud schemes, they continue to be quite successful because of the creativity of the con artist, the slick presentations, and the promises of lucrative investment returns. Fraudsters with a computer and printer can come up with phony spreadsheets and paperwork that make their investments look golden when really the returns are an illusion. Potential investors should carefully scrutinize every aspect of a salesperson’s pitch before parting with their hard-earned money.”

Brian D. Lamkin, Special Agent in Charge, FBI Atlanta Field Office, said, “While Mr. Vaughn will now be held accountable for his elaborate fraud scheme, the many victims harmed in this matter are forced to rebuild their lives as best they can. Because of the victim impact often seen in such cases, the FBI will continue to aggressively pursue those individuals who engage in this type of high dollar investment fraud activity.”
United States Postal Inspector in Charge Keith Morris said, “Our Postal Inspectors are trained to follow the money, even if the paper trail is difficult to find. Innocent victims hand over their hard-earned savings, and criminals often only invest it in themselves. No matter how complex the case, our Inspectors will make every effort to help those victims, by bringing the fraudsters to justice.”

VAUGHN was sentenced to eight years and four months in prison to be followed by three years of supervised release, and was ordered to pay restitution in the amount of $8,833,686. VAUGHN pleaded guilty to the charges on October 24, 2011.

According to United States Attorney Yates, the charges, and the evidence presented in court: VAUGHN founded and operated “CM Vaughn, LLC,” a tax and financial consulting firm based in Atlanta, Georgia. From July 2004 through March 2008, VAUGHN sold investments in a pooled investment fund or “hedge fund” called “CM Vaughn Emerging Ventures Fund.” Over 50 individuals sent money to VAUGHN for purposes of investing in the fund.

VAUGHN falsely represented to investors that his fund earned from 15 percent to as much as 50 percent per year, and stated that their investments would be “insured” and could not decrease below a certain amount. He also prepared client statements that falsely indicated the current value of each investor’s accounts. While the statements generally showed substantial investment gains, the numbers included in the statements were false, as none of the investors’ monies had actually been invested in any fund. Instead, VAUGHN had used the investments to finance a lavish lifestyle and to make payments to earlier investors. VAUGHN obtained over $10 million from his victims.

This case is being prosecuted through President Barack Obama’s Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

This case was investigated by special agents of the Federal Bureau of Investigation and inspectors of the United States Postal Inspection Service.

Assistant United States Attorney Shanya J. Dingle prosecuted the case.